Macy's Massacre - 3 Years Of Wasted Buybacks Ends Financial Engineering Dreams

Tyler Durden's picture

Macy's is down over 13% today, pushing towards a sub-$40 handle - the lowest since February 2013 - after lowering guidance and disappointing a market full of hope (and hype) that retail is back (remember, all the retail hiring last Friday). However, that is not the most prescient issue as 3 years of buying back billions of dollars of Macy's stocks - to financially-engineer earnings to ensure executive compensation is satisfactory - have been completely wasted. And worst still, the additional debt added to fund the total failure in timing of buybacks has now sent Macy's credit spiking to multi-year highs (as the stock tumbles).

"No Brainer" - Macy's actually increased their buyback pace last quarter alone - spending $900 million on stock at an average price of $53.89, a loss of $230 million of that "investment"


And the flipside of shareholder-friendly releveraging... spiking default risk...


Now what? This is the clear message that executives in every credit cycle - there is a limit to the largesse with which you can abuse bondholders in the name of levitating share prices amid a dismal reality.

As we detailed previously, if you needed further proof that US equity markets have become the preferred channel for transferring debt sale proceeds directly into the pockets of top management, Bloomberg has all the evidence you need. Here’s more:

Buybacks and dividends are rising to records in the U.S., and for many chief executives, that means a fatter pay check -- even if sales aren’t growing.


Eleven of the 15 non-financial U.S. companies that spent the most on buybacks last year base part of CEO pay on earnings per share or total shareholder return, or both, according to data compiled by Bloomberg. These metrics get a boost when businesses return cash to investors, giving companies like International Business Machines Corp. and Cisco Systems Inc. added incentive to dole out cash to stockholders.



Linking compensation to buybacks and dividends can encourage managers to sacrifice funds that could be used for long-term investments, economist William Lazonick said. It also raises the prospect that executives are being paid for short-term returns rather than running a business well.


Tying pay to performance has long been considered a shareholder-friendly move that gives executives an incentive to ensure that the company is on solid footing. Investors such as Warren Buffett have applauded payouts when they consider shares to be undervalued. Large pension funds have welcomed pay incentives, like when Walt Disney Co. in 2013 changed the way it calculates CEO Bob Iger’s stock awards.


Yet dividends and buybacks can prop up per-share earnings and total shareholder return -- lifting CEO pay as a result -- even in cases where sales are falling.


The focus on shareholder value has “led to this really corrosive feedback loop between executive compensation and corporate behavior,” said Nick Hanauer, co-founder of venture capital firm Second Avenue Partners LLC. “When everyone around a board room can justify essentially any behavior to generate a higher stock price, no stone shall go unturned.”



Average CEO compensation for the top 350 U.S. firms by revenue has climbed to $16.3 million last year, according to data from the Economic Policy Institute. That’s up from $15.7 million in 2013.


Overall in 2014, non-financial companies returned almost $1 trillion in share repurchases and dividends. As a percentage of gross domestic product, that’s among the largest payouts on record.


Not all investors are applauding the bonanza.


Amid a bull market, shareholders may not be as concerned as they should about the potential boost that buybacks and dividends can give to CEO pay, said Robert Barbetti, head of compensation advisory for J.P. Morgan Private Bank in New York.


“Boards and compensation committees should be thinking very carefully about the incentive plans and objectives that work long term.” 


As BloombergView followed up today, there is simply no question who really benefits in the end from management's exuberant buybacks: Why Management Loves Buybacks

According to RAFI's study, U.S. companies issued stock equal to $1.2 trillion last year. All told the new issues in 2014 exceeded share buybacks.


The RAFI study also found that "the cash flow statement often fails to report the majority of a company’s stock issuance.” Much of that unreported issuance is used as compensation for employees, primarily management. “When management redeems stock options, new shares are issued to them, diluting other shareholders” the report further notes. “A buyback is then announced that roughly matches the size of the option redemption. This facilitates management’s resale of the new stock."


The conclusion is that what looks like buybacks are actually thinly veiled management-compensation plans, or in RAFI's words, “simply a mirage.”

The poorly disclosed compensation structure is only half of the problem with buybacks. Timing and pricing are another big issue... as we showed above.

As Bloomberg concludes, the bigger question is simply this: Why is management at so many companies bereft of better ideas and more productive uses for corporate cash?

Maybe it's because so much of the proceeds of buybacks end up in their own pockets.

*  *  *

Finally, do you still believe the huge surge in retail jobs in the payrolls data?


Charts: Bloomberg

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Kaiser Sousa's picture

i like this version of Macy's demise better cause it has cuss words in it...just sayin'....

"It was interesting that when I looked for their earnings announcement link on Marketwatch, it was no where to be found. So I went to their website, and now I know why they don’t want the results too widely viewed. It’s much worse than the headlines reveal. When you examine their balance sheet and cash flow statement, you see the looming disaster on the horizon. The executives running this retail titanic might be the dumbest fuckers on earth. Let’s examine their brilliant strategic moves:"

HedgeAccordingly's picture

their stores are garbage.. empty shelves and old nautica and Tommy crap..

AlaricBalth's picture

Here is a recent typical Macy's review.

"Your company and service is total crap Macy's! I shipped back an order that I purchased online only to be sent gift cards instead of the money being credited to the original form of payment, my credit card. I called to have the money put back on my credit card, spoke with a supervisor and was told I would have to wait 24-48 hours for the credit. That time has gone by without a credit. Called again only to be put into the merry go round of your awful phone system, gave up a few times then finally called and got to talk with an agent. I was then told 7-10 business days I'd have to wait. Unacceptable! Asked for a supervisor (waited 20 minutes for one) who then told me 10-15 business days!! I made her give me a final date of when to expect my credit. November 6th is the final date that I was told my credit would appear on my credit card. That is over a month from when the items were shipped back to you!

This is TERRIBLE service and from reading all the complaints online, it seems to be your norm. It's very sad that I am expecting that this will not be resolved by November 6th and I will have to call back into your crappy phone system and be told another 15 days! I will wait but promise you, I will post this all over every website I can, letting people know what a terrible company you are to do business with. Once I get this resolved, I will then close my credit account that I've had since 2000. I will never shop in your stores again because of how awful you are at handling people's money. Customers beware shopping at Macy's!"

And from an employee in Orlando. "I come into work not knowing where I'll be working that day. I didn't learn very much all I learned was how to make a display and restock product.Management was awful there was no one to be around to supervise. I had no coworkers to ask help of. Not knowing what my position was or where I was supposed to work.The most enjoyable was being able to go home."

I guess the 2200 management level employees Macy's has cut since January had unintended consequenses. But executives got their bonuses due to excessive share repurchases.

Boris Alatovkrap's picture

Boris is not know what Macy is sell, maybe is not supply what consumer is demand. At Central Universal Store (TSUM) in Moscow, Boris is can acquisition all of daily need and many thing is nice like borscht in can, jar of jell pig feet, fresh cabbage roll, rubber boot, thick leather glove.

Boris Alatovkrap's picture

Uh-oh, someone is down vote Boris. Maybe is not like borscht or maybe is not like cabbage roll?

Alvin Fernald's picture

Will 'Macy's Massacre' be a float in the upcoming parade?

KnuckleDragger-X's picture

You can bet that everybody in the C-suites have golden parachutes when the crash comes......

OldPhart's picture

I used to be shocked to see major retailers fail.  Now I look forward to it.

For each of these locations, as the large companies fold, more and more small businesses will be able to open up and supply product at true competitive prices.

Now, I eagerly await the demise of WalMart.  That behemoth killed all kinds of small businesses in thousands of towns.

Chris Dakota's picture
Chris Dakota (not verified) Kaiser Sousa Nov 12, 2015 7:26 AM

They sided with shoplifting hispanics.

SillySalesmanQuestion's picture

I'm sure they can triple down at The Buyback Casino based on their previous wagering

ghostzapper's picture

All Hail the Federal Reserve and the Bankster Cabal!

bankonzhongguo's picture

When was the last time you bought something at Macy's?

For me it was 30 years ago when I needed an emergency dress shirt for a meeting.

Macy's. Sears. Blockbuster. Radio Shack. Circuit City. B Dalton.

The list goes on an on.

The only user for these empty malls are city/county government welfare offices.


pound the vix's picture

Now they can buy back their debt at a discount and count that as earnings!!!  the cycle continues

katchum's picture

I'm always amazed how zerohedge masterfully manipulates historic charts.

rpboxster's picture

I hate Macy's.  They ruined Hudsons and Marshall Fields.  The constant sales scheming is such a turnoff, and their private label stuff sux.  It's basically TJ Maxx, with coupons.

markitect's picture

Ah yes when Department Stores actually gave a fuck, before all being mushed into one big ball of crap.  I remember well all the stuffed shirts and bloviating morons on TV telling us it was for the betterment of the experience, good for the consumer etc.  The same idiots said the same thing about banks back then too.  

meterman's picture

Hate is not the word to describe Macys. Detest - Despise -

Abhor - Loath maybe,but I give you the idea that the word 

"Macys" is really all of the above at one and the same time.

It is a term for uberHate - as in "I macys Barack Obama.

May Macys and all who work there rot in hell.

hobopants's picture

Yes it's self serving, but it's also the only game in town. Cheap money forever thanks to the fed and an economy with no demand, buy backs paradoxically seem like less of a waste of money than R&D and equipment at this point.

Investing in R&D and capital equip. requires having real markets with price discovery as well as honest stats. Without those measures of risk/reward no one is going to risk a total shot in the dark as to what direction to take their enterprise. Companies only have one indicator they can be certain of, cheap Fed Bucks forever so they logically invest accordingly.

undercover brother's picture

Everyone here knows this already, but it's good that this common practice is seeing the light of day.  Perhaps even one day the lame stream media might even report it.  

chart_gazer's picture

This post should be required reading for all the bozos on stage last night.

orangegeek's picture



Nicely done Macys' exec's.

buzzsaw99's picture

3 years of buying back billions of dollars of Macy's stocks - to financially-engineer earnings to ensure executive compensation is satisfactory - have been completely wasted...

that sentence doesn't make sense. how could it be wasted if there was satisfactory executive compensation? that's just business as usual.

rsnoble's picture

Sub $40???  Sub-zero would be too much for this fucking garbage and a prime example of too much fkn money floating around where it shouldn't be.

cigarEngineer's picture

Why are you all in favor of corporations getting bigger, stronger, and more capable of influencing the political process? Stock buybacks are a way for investors to loot the company and earn a return on their risky investment. This is the way the world works. Legalized stealing for those who can. And everyone can buy stocks, although what most should do is invest in themselves.

That it makes corporations weaker is good. It allows upstarts to disrupt the market.

yogibear's picture

Much more failures to follow as buy-backs become the new monkey on their back.

TheSkipper1967's picture

Ha ha funny.  I just cancelled my Macy's credit card.  I bought one item there is the last year.  A dress for my daughters prom.  Got the card to get a discount on top of the instore discount.  I also got rid of another bank card.  Slowly removing my self from card after card and my bank.  Takes an ex-wife to finaly set you free.

Starkman's picture

Macy's and every other big corportation know what's coming. They know it's all going to tank soon, so buybacks it's been. When they can't do it anymore, and when everything else fails, the execs will sail off into the wild blue yonder, taking with them their chests full of those paychecks and bonuses!'s not like any of this isn't obvious.

meterman's picture

Macys is run be crimminals. They have been stealing from their customers for years. It's time they are getting what they deserve - FAILURE - But PRISON would be more just.